Monday, November 5, 2012

Glu Mobile Presses Restart After Disappointing Q4 Guidance

Don't kid yourself. Glu Mobile's (GLUU) lowered Q4 guidance is very bad news for the company in the short term, and may weigh heavily on the stock price for a few quarters. This is because Glu and the majority of mobile gaming organizations launch most of their titles near the end of the year. It's the holiday effect. All that Christmas and Hanukkah money for a certain male demographic goes to buying new smartphones, and the gaming apps that go with them.

Although the dice are running cold for Glu, and the stock has sold off to historical proportions ($5.90 52 week high to roughly a 52 week low of $2.50 where it currently trades), I am still long the stock. They remain a growth company in the growth sector of mobile content creation. Smartphones and tablets aren't going away soon, and Glu still remains one of the only gaming pure plays on these devices.

If you are a day trader looking for the big kill, my advice is to seek another security. If you have a longer time horizon, this may be a good entry point for you. However, before you put some money to work, let's look at the Q3 conference call to see what went wrong.

The man in charge of Glu Mobile is CEO Niccolo de Massi. He, along with consiglieri and CFO Eric Ludwig made no attempt of hiding the fact that they were overwhelmed by the degradation of their existing product catalogue. This degradation occurred because gamers tastes have migrated from the solitary arcade style games, to the player vs. player (PVP), or mobile social games.

Glu Mobile honchos saw this change coming over a year ago, and as a result, purchased mobile social gaming company GameSpy in Q2. What management didn't anticipate was that the player vs. player phenomenon would not only be an immediate must for many participants, but a seachange for the entire industry. It's a revolution, not an evolution. Although new titles launches in Q3 were well received by consumers and critics, they exhibited weak average revenue per daily active user. Because of this, Glu's management has altered their battle plan.

A big switch in an effort to monetize, they hired Electronic Arts (EA) and Zynga (ZNGA) veteran Matt Riccetti as President of Studios. Glu has a large global syndicate of operations, and Mr. Riccetti's job will be to oversee production values with an eye on profitability. As the CEO de Masi stated:

We are determined to prevent the reoccurrence of our weak Q3 new title performance. In order to do so and maximize Glu’s long-term growth, I have made the decision to delay five of our Q4 title launches. The delay is to enable our new President of Studios to review and refine the monetization system to his satisfaction. As such by year-end, we anticipate launching only two more titles. The run rate existing Q3 from new title launches has significantly, adversely impacted our prior Q4 expectation.

That quote just about says it all. However, this is not an affront to Glu's executive team. To be fair, it must be noted that Mr. de Masi has a done a tremendous job turning the organization around in three short years. The stock was selling for twenty-three cents in 2009. In addition, Mr. Ludwig has been with Glu Mobile since 2005 under the previous regime. He knows where all the bodies are buried, and has been instrumental in keeping the engine oiled.

When we look at the numbers, the press release for Q3 doesn't look that bad. The disappointing metric is that revenues are projected to be flat going into Q4, and this was the quarter de Masi and his cohorts expected the company to become profitable. CFO Ludwig reports this in the prepared statement section of the conference call:

We are adjusting our full year 2012 revenue and profitable guidance to reflect our updated Q4 expectations. We currently expect total non-GAAP revenues to be in the range of 86.4 million to 87.4 million, which includes 73.6 million to 74.6 million in non-GAAP smartphone revenues. We now expect the adjusted EBITDA loss of approximately 3.5 million to 4.4 million for the full year 2012.

He goes on to say they are not providing any update to 2013 at this point.

John Maynard Keynes once said: "When the facts change, I change my mind". Well, I've changed my mind on Glu Mobile. Although I'm still long the stock, and utilize it as a trade from time to time with the wild gyrations in equity value, I'm not so sure they won't be scooped up by a larger entity. I originally thought they could make it as a stand alone organization. I'm just not that sure now. In whatever unfolds during the next year, I'm confident that management will do what is necessary to increase shareholder value.